India Journal: Why We Need More Lobbying

What made the recent scandal in the 2G spectrum allotment, the biggest in India’s recent history, possible? How is this different from corruption of a generic sort, such as bribing a cop to avoid paying a traffic ticket?

Rupa Subramanya Dehejia

Let’s start with the nature of the process. As a first step, you have a scarce resource, be it coal or the airwaves of mobile telephony, that is publicly owned and which the government, in theory, manages in trust for the Indian people. In practice, the government controls the disposition of this resource and private users or operators want access to it so they can make a profit from it. How should the government facilitate this private use of a public resource?

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In the 2G case, as with all scarce resources, the efficient way would have been for the government to have auctioned off the spectrum to the highest bidders. Assuming a competitive bidding environment, the government could have extracted the full value of the resource as government revenue. At the other extreme, if the government simply gave away licenses to its friends, its revenue would be zero, and the full value would be transferred to the people who received them.

What in fact happened in the 2G case was something in between: the licenses were given away “first come, first served” to people who arrived on the scene, and even then some were given an unfair advantage. They did pay something but not the full value. So the loss to the exchequer is a theoretical construction: It’s money it didn’t receive, not money that flowed out from government coffers.

An efficient outcome would have required that the spectrum be auctioned in a transparent and rule-governed system, preferably administered by an independent agency with no direct stake in the outcome. Had this or a similar process been followed, the possibility of corruption would have been reduced, if not eliminated, and its magnitude would have been attenuated.

As a general rule, corruption arises in the presence of inefficient or excessive regulation as during the License Raj era. Back then, if you needed a phone line, you had to go through many layers of bureaucracy to get a connection, which usually took several years. The simplest thing, if you had the money, was to just pay a bribe and speed up the process.

Blanket condemnations of corruption often fail to ask: what’s the counterfactual, the alternative scenario?

Paying a bribe could actually increase economic efficiency as a second-best option, compared to having bad regulations and insufficient economic activity because the bad regulations are honestly adhered to. But bribing is obviously worse than having the right regulations and no corruption.

If the counterfactual is a fairy tale world with benign government, good regulation, and no corruption, then, sure, corruption is bad and life in India is hardly a fairy tale! If the counterfactual is an even worse outcome, where nothing gets done, some corruption may be better than none.

In general, corruption can certainly be reduced to a minimum by having sensible and not excessive regulations. This makes paying a bribe as you go about your business unnecessary. That’s why mundane corruption is virtually absent in Western countries. Of course, having too lax regulations poses its own risks, as the global financial crisis demonstrates. That can be corruption in another form, where the regulators and the regulated are too cozy, as happened in the U.S. financial system.

In a recent interview, the former Central Vigilance Commissioner said that almost one in three Indians is “utterly corrupt,” only 20% of the country’s population is unwaveringly honest, and the remaining 50% is considered “borderline.”

The average Indian probably feels corruption is unique to India given how rampant it is. But it’s not.

One tack that India could take to diminish corruption is to legalize lobbying, which currently appears to exist in a rather ambiguous area of the law. In the U.S., lobbying, which aims to affect government policy, is perfectly legal and reduces corruption.

Lobbying hasn’t been portrayed in the best of lights recently with the tapes of conversations conducted by lobbyist Niira Radia. But making lobbying above board, recognized and transparent in India would make corruption less necessary, and therefore automatically reduce it.

Would we gain by substituting lobbying for corruption? It is certainly less distorting and does not give privilege to cronies to the same extent. Outcomes accordingly are seen as fairer, which is a social good.

In India, there’s social acceptance of corruption, so there’s no real shame or social stigma attached to being involved, either at the giving or receiving end. Replacing it with lobbying should serve to stigmatize it, as it has in Western countries, and will reduce the inefficiency, arbitrariness, and waste that results when corruption serves as a second-best tool to achieve economically beneficial ends.

People generally discuss corruption in black and white terms, focusing on its moral dimension. Far more fruitful would be an emphasis on reducing the incentives to indulge in it, and making honest behavior “incentive-compatible,” in economists’ jargon. Central to that will be eliminating what remains of the License Raj, ensuring a fair auction of scarce resources, and moving toward a culture based on lobbying, not bribing.

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